firm is considering a project with the following after-tax cash flows:

You learn that the firm can abandon the project, if it so chooses, after 1 year of operation, in which case it can sell the asset and receive $15,000 after taxes in cash at the end of Year 2.
The WACC is 12%.

a. What is the project’s expected NPV without the abandonment option?

b. What is the expected NPV with the abandonment option?

c. What is the value of the abandonment option?

Transcribed Image Text:

Best Case Base Case Worst Case 25% 50% 25% PREDICTED AFTER-TAX CASH FLOW FOR EACH YEAR 0 ($25,000) (25,000) (25,000) 1 $18,000 12,000 (8,000) 2 $18,000 12,000 (8,000) 3 $18,000 12,000 (8,000)